Online trading platform CMC Markets‘ (LSE:CMCX) share price crashed in early trading this morning following the release of its latest trading update. What’s got the market so spooked?
Subdued market
Today’s statement started well enough. Having made the most of the last financial year, CMC said that client assets under management (AuM) continued to hit “near-record levels“. The number of active clients had also remained fairly consistent over the five months to the end of August and was up “around a third” from before the whole coronavirus crisis kicked off.
However, it was at this point that the tone shifted. According to CMC, “subdued” market activity during July and August has meant lower trading by new and existing clients. Having attracted so many people to its platform over the last year or so, CMC also reported that client income retention has been “moderately below” its 80% target.
If the recent lack of activity continues, it believes net operating income for FY22 will now come in somewhere between £250m and £280m.
Clearly, news like this (as well as an indication that operating costs were increasing) was never going to be greeted enthusiastically by the company’s investors. But is a 25% fall truly justified?
Has the CMC Markets share price fallen too far?
Personally, I think the fall is overdone. Having benefited so much from the incredible volatility seen in markets last year, there was always going to come a time when trading moderated. Let’s not forget that, before today, the CMC Markets share price had increased 35% in just 12 months. Nothing rises in a straight line.
There’s also a lot still to like about this company, at least in my view. It appears to have a sound strategy for growth and an incredibly robust balance sheet. The returns on capital metric beloved of UK star fund manager Terry Smith has been high for many years. A potential 16.9p per share dividend also has this stock yielding a chunky 5.5% at its new, much lower price. Now, no income stream can be guaranteed. Even so, this does strike me as adequate compensation for what could be rough times ahead.
On the downside, the small ‘free float’ means the share price is potentially far more volatile than that of other stocks. Today would appear to be clear evidence of that! Second, the threat of increased regulation in this industry can never be discounted. Third, there’s no shortage of competition for clients.
Letting it settle
I’d need to be very careful before adding CMC Markets to my portfolio. After all, I already own shares in the market leader IG Group. Having too much exposure to one industry invites trouble. It can be wonderful during the good times but a potential nightmare during the bad.
That said, if I didn’t own IGG, I’d be tempted to get involved with CMC at some point. This FTSE 250 member presents as a quality operator, albeit one that has become a victim of the sudden swing in Mr Market’s mood.
Quite where the share price goes in the near term, however, is anyone’s guess. In recent weeks, we’ve seen several previously-loved stocks tumble and continue tumbling. Avon Protection and Best of the Best spring to mind.
If I did cave in and buy, I’d wait for the dust to settle first.
